August 4, 2011 [OPIS] - Magellan Midstream Partners said that competition among logistics companies and oil companies in bringing cheap Mid-Con, Shale and Canadian crude to the refining hub on the Gulf Coast is strong.
With companies scrambling to offer takeaway solution for the Mid-Con crude glut and capitalize on the favorable arbitrage economics, shipping companies and refiners are spoilt for choices. Magellan is still in negotiations with potential shippers for a crude pipeline reversal project on Longhorn pipeline, which would bring West Texas crude from the Permian Basin to Houston.
The project has been under consideration since last year as Magellan aims to secure enough long-term shipping contracts to back up the economic viability of this pipeline reversal project. The pipeline reversal could allow up to 225,000 b/d of crude delivery to Houston from Permain basin. The initial flow would be at 135,000 b/d.
The $275 million capital expenditure for this project will include the pipeline reversal, five breakout terminals in Houston and a distribution network on the Gulf Coast. Magellan had said previously that it began with permitting and final engineering work for the project. Despite the slow negotiations, Magellan maintains that the completion date for the pipeline reversal remains unchanged for the third quarter of 2013.
Besides Magellan, a host of companies are considering or already working on delivering more crude to Gulf Coast via rail, barges and pipelines.
NEW PARTNER
As for its new 180-mile-long pipeline project to deliver crude and condensate from the Eagle Ford Shale formation to Magellan’s existing distribution terminal system at Corpus Christi, Texas, Magellan is now working with a new undisclosed joint-venture partner on the low-cost project. The previous joint-venture partner was M3 Midstream LLC (Momentum). Magellan is actively talking with third pary shippers on shipping commitments for this line.
The pipeline, which is slated for completion in 2012, will originate from LaSalle and Live Oak County, Texas, and end at Corpus Christi. The project cost for Magellan is estimated at $75-$85 million. The company declined to provide the estimated total project cost. The pipeline will supply refineries and markets in Corpus Christi, Houston and Beaumont, Texas, and St. James, La.
The pipeline will provide Texas producers additional marketing flexibility to sell their products in the field or at downstream destination points to a variety of customers.
The project would include an expansion of crude oil and condensate storage at Magellan’s terminal in Corpus Christi. Besides shipping competition, Magellan also acknowledged a rush to build storage tanks at Cushing, Okla. Magellan downplayed a question from an analyst about risk of overbuilding at Cushing.
The company is confident that Cushing would remain a critical storage and blending hub for increasing Canadian crude and condensate imports.
Also, Magellan is conservative in its economics and planning for Cushing crude storage tank projects, which helps to keep costs low.
The company continues to make progress on the construction of crude oil storage in Cushing, Oklahoma. Of the 4.25 million bbl of new storage included in this project, 2.5 million bbl are currently in service. The remaining tanks are expected to be placed in service by the end of Oct. 2011.
Meanwhile, Magellan reported record quarterly operating profit of $128.7 million for second quarter 2011, compared to $124.7 million for second quarter 2010. The partnership also generated record quarterly net income of $103 million for second quarter 2011 compared to $102.5 million for second quarter 2010.
